Individuals and institutions are looking for more sustainable options that make an impact. There is an increasing desire to do good in business, and organizations are seeking investments to match their values. This is one reason why “sustainable investing” or “impact investing” is growing in popularity, especially for non-profits.
Environmental, Social, and Governance, commonly referred to as simply ESG, is growing in popularity as a way to invest “sustainably.” ESG investments meet the increasing demand for ethical participation in the market. There is growing public concern regarding human rights and environmental issues which are influencing investor decisions and driving more organizations to consider ESG.
Interest in this topic is rising for both individual investors and large for-profit organizations as well, but a larger interest has been generated in the non-profit space. Non-profit organizations such as endowment, charitable organizations, or foundations continue to educate their finance committees and respective boards on why ESG investments should be considered for their investment strategy.
Daniel Dingus from Fragasso Financial Advisors has worked in the institutional investment area for over twenty years as a non profit financial advisor, there are five reasons non-profits are considering ESG. First, non-profits can incorporate ESG into their investment portfolio in many facets. Investors have different viewpoints on how it can be adopted into the portfolio, with the most fundamental method being where ESG designated strategies are exclusively used and precede performance goals. Though this works just fine, there is a potentially more appealing option available to non-profits. This is when their investment strategies are not dictated by scoring and ESG designations but rather integrated into the investment screening and review process. When the process of performance and ESG are combined instead of dictating the other, it can be much more comprehensive and beneficial. When combined, non-profit investors can benefit from the generation of sustainable wealth creation while maintaining value alignment, prudent risk management, and sound fiduciary stewardship.
The second reason non-profits are focusing on ESG investing is because donors also care about ESG. Non-profits rely on their donors and need to maintain positive relationships. ESG investing often aligns with the values of both non-profits and individuals supporting their organization. ESG considerations can fully encapsulate the goals of the donor and is increasingly becoming appealing to investors. This was seen is a Morningstar report that stated that 72% of U.S. investors had expressed interest in more sustainable investing. When ESG considerations are not made, and investments don’t encapsulate the goals of the donor, it can present conflict and could potentially reduce donations.
The third reason why non-profits are focusing on ESG is that it provides an alternative. ESG is a different type of investment that offers greater flexibility than others, like Social Responsibility Investing, known as SRI. Though some may prefer SRI, there is no doubt that it can be somewhat limiting as it is structured to actively choose or remove investments based on specific guidelines. The alternative to this is ESG. ESG analyzes a non-profit’s Environmental, Social, and Governance practices as well as their traditional investment and financial screening processes. This makes ESG much more inclusionary, and as a result, the portfolio can be more in line with conventional benchmarks.
One of the biggest appeals of ESG investing is the impact it can make and how this type of investing may align with the values of a non-profit. This is the fourth reason why non-profits focus on ESG investing. Let’s consider an example of a non-profit focused on pollution reduction and environmental causes. This non-profit does not want its investments to be connected to unsustainable practices, pollution, poor animal welfare or practices that harm the environment. Not only is this a concern for donors, but it won’t go over well with the board or public. For non-profits, their mission and values must be considered when investing.
ESG makes investing more straightforward for these organizations. They can look at an organization and determine whether their goals, missions, and actions match their own. If they do, they may then choose to invest in those securities. Dingus worked with an executive director who shared a quote that sums this up perfectly, “We are committed to many social causes, and investing alongside companies that seek to do well in these areas aligns with our beliefs.”
In addition to investments matching their own values, non-profits are looking for low risk and high returns. This is the final reason why more non-profits are focusing on Environmental, Social and Governance investing. ESG investment’s risk and returns may be the same or even better than traditional investing. Though there isn’t a great deal of empirical evidence in the United States, basic logic suggests that companies that do good have better long-term performance. This is because more significant risks are associated with investments lacking good records on Environment, Social, or Governance factors.
In summary, utilizing this type of investing can be a way for a non-profit to make a more positive impact with their investment strategy. In addition, it allows them to expand the reach of their own organization, supporting causes like their own, whether that be human rights, animal welfare or environmental issues.
ESG investments are growing rapidly in the non-profit industry. Though these reasons are not encompassing, they clearly show why an increasing number of non-profits are focusing on Environmental, Social, and Governance Investing (ESG).
Further, they are core illustrative principles to review and consider with your own investing.
Forbes dubbed ESG as “one of the most rapid and successful movements of the past 20 years,” and it is clear to see why. Though the process of ESG investing may seem complex, a knowledgeable advisor can help guide your non-profit through this ever-evolving landscape. By reviewing your investment policy with an advisor, you can examine how your investments are currently reflecting your values and where you could be making a bigger impact.
Investment Advice offered by Investment Advisor Representatives through Fragasso Financial Advisors, a registered investment advisor.